Barry McCarthy, Chief Financial Officer of Spotify, attends the annual conference of Allen & Company Sun Valley, July 11, 2018 in Sun Valley, Idaho.
Drew Angerer | Getty Images
When Barry McCarthy showed up to run Peloton about three months ago, he was surprised to learn how upset the supply chain was and how quickly the company’s coffers were shrinking.
“The nature of the changes is that they are full of surprises,” McCarthy told analysts on Tuesday during his first conference call with Peloton after the win.
After digging into the business, the CEO said he had learned that Peloton was “weaker in the supply chain” than he expected. He said the biggest surprise in the previous quarter was cash flow and how bleak it was.
However, the former CEO of Netflix and Spotify also said he was also surprised by Peloton’s ability to “deal quickly” with its cash flow situation without diluting existing shareholders while continuing to capitalize on the business appropriately. Another bright spot noted by McCarthy is that he is discovering more talent at Peloton headquarters than he thought he would find.
McCarthy’s comments to Wall Street on Tuesday were incredibly high, given Peloton’s falling share price and declining investor confidence that the business could be successful in a post-pandemic world.
The CEO’s letter to shareholders on Tuesday came with disappointing results for the quarter ended March 31 and bleak prospects for the current quarter, which ended June 30, marking the end of Peloton’s fiscal year. McCarthy was quick to point out areas where Peloton’s former management has not been so successful, while laying the groundwork for its transformation scheme.
At least for now, investors are more focused on the current sour state of affairs. Shares of Peloton fell to their lowest level on Tuesday morning, dragging the company’s market value to about $ 4 billion. At the beginning of last year, it was $ 50 billion.
However, McCarthy ended the conference call, telling Wall Street that he was “quite optimistic” about the company’s way forward, “regardless of the share price.”
“I don’t want to sound polyanistic, but I hope that one day we will soon look back on this conversation as one of the important turning points in business,” he said.
Change in priorities
McCarthy’s checklist includes:
- Drilling into third party retailers by selling Peloton products through other businesses
- Growing awareness of the company’s digital application, which may be an option for people who do not want to engage in a bicycle or tread machine
- International expansion
- Dissemination of a wider pilot test in which customers pay a flat rate to rent one of Peloton’s stationary bikes and have access to its live and on-demand training
“We have to be good in hardware, but being good in hardware is not enough,” he said during the conversation. “And that requires a change in business investment priorities.”
It also, importantly, aims to bring businesses back to positive free cash flow in the coming fiscal year.
The recent infusion of money from JPMorgan and Goldman Sachs should allow him to do so, McCarthy said, despite all the economic difficulties. According to McCarthy’s letter, Peloton ended its last quarter “weakly capitalized” with $ 879 million in unlimited cash and cash equivalents.
Many investors are likely to pause until they see greater signs of progress. Some are also worried that Peloton could lose part of its existing subscriber base – which proved loyal during the pandemic – if they change too much and too soon.
UBS analyst Arpine Kocharian said he expects Peloton investors to be more concerned in the short term about the company’s ability to maintain its cash flow and liquidity. Peloton’s strategy at McCarthy is to focus more on the net present value of the subscriber than on the previous focus on hardware profits, Kocharian said in a note to customers.
Other analysts question whether McCarthy’s strategy is really that different from that of former Peloton CEO and co-founder John Foley.
Peloton enjoyed success under Foley, who led the affiliated fitness equipment maker in the midst of a pandemic. But it also experienced challenges as consumer demand began to decline, but costs continued to rise, and Peloton made investments in things like additional manufacturing centers that it no longer needed.
“The company continues to suggest that they know they need to turn around,” said Simeon Siegel, an analyst at BMO Capital Markets. “Yet they adhere to this notion that their history of growth is their northern star.”
“If the company is simply working on selling its existing stocks and focusing on embracing its existing loyalists, there must be a reasonable path to profitability,” he added. “The problem is that history is clouded by the belief that they have the right to grow as far and as fast as they want.”
McCarthy reiterated on Tuesday that Peloton’s goal is to one day count 100 million members, a goal that Foley set in 2020.
“I know of digital applications that already have more than 100 million people focused on fitness. And I can’t think all my life about why, given our success at the top of the category, we couldn’t be one of those digital apps, “he said.
Peloton had 7 million subscribers as of March 31.
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